Labor's convincinging federal election victory was equally a repudiation of radical free-market policies of the past 25 years.

Prime Minister Kevin Rudd now has an opportunity to set a new economic direction for Australia. He has broadly indicated that Australia is heading towards Paul Keating's prediction of becoming a banana republic, but his language has been more restrained. Starting with his reply speech to the last Costello budget, Mr Rudd has repeatedly asked - what happens after the mining boom?

This is code for what is well known around Canberra. The mining boom and current interest rates - which are higher than in most developed countries - are pushing up the exchange value of the Australian dollar. However, some financial commentators fear that, when the boom subsides, the sheer burden of our foreign debt could push the dollar down from around its current US86¢ to below US40¢. This would risk a run on the Australian dollar and a major economic crisis.

Largest current account deficit

Recently, Ausbuy pointed out: "Australia has just posted the largest monthly current account deficit in our history ($2.98 billion) in the middle of the biggest mining boom we have ever known."

These deficits have to be paid for, which increases our net current debt. At the moment, foreigners are attracted by our high interest rates.

In theory, if the dollar were to fall, it should help manufacturers become more competitive; but the high-dollar, radical free-trade policies and chronic neglect of industry policy by governments since the 1980s have left the economy with a major structural flaw.

As Ausbuy warned, these policies are causing the "destruction of our manufacturing industry", which is moving offshore. Indeed manufacturing risks falling below a critical mass of industries.

Meanwhile, agriculture - Australia's second largest export sector - is facing the biggest crisis in Australia's history. This crisis is also the result of failed radical free-market policies. The drought is now bringing these crises to a head.

It will require decisive government intervention to now secure the future development of manufacturing and agriculture, which is vital to bringing down the foreign debt and to maintaining Australia's economic independence from the international financial markets and its status as first-world nation.

During the recent federal election campaign, the National Civic Council proposed some key industry policies vital to cutting the foreign debt.

Oil and motor vehicle imports are the two biggest imports driving up Australia's foreign debt.

Yet Australia is uniquely placed to create a huge ethanol fuel industry to replace imported oil, with all the benefits of a new high-value industry and improved air quality.

With government assistance, Australia could also develop a domestic motor vehicle industry producing three to four times its current output, thereby massively cutting imports.

To secure agriculture, there has to be a moratorium on water trade while a major review of federal and state water policy is undertaken. The current water-trading policy threatens to cripple the most productive regions of agriculture.

Then policy-makers must recognise that Australia exports only 30 per cent of agricultural product (measured at first-stage production), not 80 per cent, as has been mistakenly claimed for the past quarter-century. Policy should be focused on the domestic, not the export, market as being the primary market for agricultural product.

Cutting back the foreign debt is now imperative. The alarm bells have been sounded by many economists, including Dr Chris Richardson of Access Economics, Dr Peter Brain, and John Edwards, chief economist of HSBC.

Dr Richardson said almost three years ago, "OK, it's panic-button time. It will take longer than markets realise to rein in a current account deficit in the 'banana republic' range." (News Weekly, February 12, 2005).

New industry policy must be aimed at producing trade surpluses as part of the range of policies fundamental to bringing down the foreign debt.

Asian meltdown

Further, Australia should aim at building up substantial foreign exchange reserves to defend itself against any run on the Australian dollar. East Asian nations, China and Japan have built huge foreign reserves to avoid any repeat of the 1997 Asian economic meltdown.

Such policies involve a serious modification of the free trade model. The theory for this has already been developed by Ralph Gomory, IBM's former senior vice-president, and William Baumol, former president of the American Economic Association, in their landmark book Global Trade and Conflicting National Interests.

They argue that Western nations will have to choose what industries they want to keep and which they are prepared to lose to the emerging economies of China, India and Russia, where over 1.5 billion low-paid, skilled and professional workers are entering the world economy. They will take tens of millions of jobs from Western nations.

The new Rudd Labor Government must act decisively and soon.

- Patrick J. Byrne is national vice-president of the National Civic Council.